6 Ways to Spot an ICO Scam

Earlier this year in February, cryptocurrency news site Bitcoin.com announced the findings of its study of ICOs that were held during 2017. The most glaring result of all was that of the 902 projects that were tracked:

142 failed before raising funds

276 failed after fundraising

a further 113 were considered “semi-failed” – either the team ceased communication on social media or the project’s community was deemed too insignificant to be considered a sustainable project.

This means that 59% of token events last year were confirmed – or likely-to-be confirmed – failures. And that’s despite the fact that those ‘failures’ managed to raise a whopping $233 million between them!

Of course, there is always a chance that new start-ups will fail. But many of these projects were scams that had no intention of ever creating a working product, plain and simple. And that fact underlines how crucial it is for investors to identify potentially fraudulent ventures as early as possible.

As such, what follows is a checklist of questions you should ask yourself before participating in any future ICO:

What does the whitepaper/website look like?

A legitimate project will always have a strong whitepaper before staging an ICO. It provides one of the very few ways for an investor to gain insight into the company and its vision.

If most of the whitepaper content is geared towards the company’s claims concerning future financial rewards – and is also noticeably thin on explaining the technical side and how exactly it intends to achieve those rewards – it’s simply not going to fill investors with much confidence.

If, on the other hand, it contains clear explanations about the technology being used, the team, the product, its intended use cases, the project’s future roadmap and the overall business model, then it should provide more assurance.

Also watch out for plagiarized white papers, which seem to have become more frequent. Recently, for example, the Dadi project had to come out and address why it copied parts of the SONM white paper. Poorly designed websites should also raise a major red flag.

How transparent is the team?

Easily verifiable identities are a must for each and every team member. At the very minimum, each member should have a LinkedIn profile, detailing prior work in the field of blockchain (especially for the developers), or in the industry with which the product is concerned.

The more evidence of team members being previously or currently involved in related business activity, the better for the legitimacy of the ICO project.

But if the team remains partially or wholly anonymous, with little to no online track record, this should raise a clear warning sign. Moreover, some scams have even gone to the extent of putting up fake LinkedIn profiles, so it’s worth carefully checking the employment history, qualifications and network/connections.

Is the GitHub repository empty?

Open source projects will usually have their code base posted on repositories such as GitHub. This allows everyone to review the code and be able to identify errors/improvements as appropriate. Indeed, even projects that are not open-source should have publicly accessible code that can be scrutinized.

An empty repository, or one that is non-existent altogether, should raise major concerns. Indeed, a company being patently unclear about how the technology works strongly indicates that the project is a scam. As such, check that the project has uploaded relevant files to the repository.

Is the ICO showing signs of regulatory compliance?

While regulators all over the world continue to hone in on the ICO space more deeply and establish rules and guidelines with every passing week, certain standards of good practice are already in place for new projects to follow.

Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) procedures, for instance, provide a strong indication of a project’s legitimacy, and signal to investors that a company is willing to be in compliance.

With that in mind, it also makes sense for investors to know where the company is registered, whether it is easy to obtain a copy of its certificate of incorporation, and whether a list of company directors is available.

How disputable are the company’s claims?

New companies are always going to talk up their projects to attract investors. But some have been making claims about their capabilities and what they can offer that are simply not true.

Some have even claimed, falsely, that Vitalik Buterin is among their advisors, such as the Primalbase ICO. Clearly, having the Ethereum founder in a such a role would be a major boon for any new company. But ultimately Buterin himself has had to officiallyrespond that he is acting as an advisor for only two projects.

The company might also falsely claim higher numbers are subscribed to their ICO, as well as promise crazy returns. The fraudulent Plexcoin ICO springs to mind, with investors being promised profits of 1,354% in less than a month, and which ultimately resulted in jail time for the man behind the project.

How clear is the roadmap?

A roadmap outlines when an ICO project’s future funding objectives will be achieved, with the illustrative aid of a clear timeline usually published in the whitepaper or on the website. The lack of a clear timeline should alert investors that the project is not concerned about the future, and thus implies that short-term financial gain is the priority. Such projects should be scrutinized further, or avoided altogether.

John DeCleene

Whilst having spent a lot of his life in Asia, John DeCleene has lived and studied all over the world - including spells in Hong Kong, Mexico, The U.S. and China. He graduated with a BA in Political Science from Tulane University in 2016.
Fluent in English and proficient in Mandarin and Spanish, he can communicate and connect with most of the world’s population too, and this certainly helped John as he gained work experience interning for the U.S.-Taiwan Business counsel in Washington D.C. as an investment analyst and then working alongside U.S. Senator Robert P. Casey of Pennsylvania as a legislative intern. He subsequently worked as a business analyst for a mutual fund in Singapore, where his passion for travel and aptitude for creating connections between opportunities and ideas was the perfect intersection of natural ability and experience, spending his time travelling between Cambodia, Hong Kong, and China investigating and discovering untapped investment opportunities.
John is a fund manager for OCIM’s fintech fund, and currently progressing towards becoming a CFA charter holder. He loves to travel for business and pleasure, having visited 38 countries (including North Korea); he represents the new breed of global citizen for the 21st century.